Tuesday, June 30, 2015

 

In Which I Discuss Political Economy With a Ten Year Old


The Girl is ten -- almost eleven, she would prefer I say -- and curious.  The book she was reading last night contained a reference to the Great Depression.  I was in the room at the time.  Conversation ensued.  In my defense, this was entirely impromptu.

TG: Dad, what was the Great Depression?

Me: It was a period of about ten years when the economy really didn’t work well.  There weren’t enough jobs, and lots of people were poor.

TG: Why?

Me: It’s complicated.

TG: Tell me!

Me: Okay, well, people sort of ran out of money, so they stopped buying things.  When that happened, businesses couldn’t sell things, so they stopped making things and they fired the people who had made things.  Then those people couldn’t buy things, so it got worse.

TG: How did they run out of money?

Me: Well, they borrowed too much, and couldn’t pay it back.  Then they stopped buying things, and the companies that make things went out of business.  Then the people who worked at those companies lost their jobs, so they stopped buying things, and so on.

TG: It’s like a spiral.

Me: Exactly.

TG: How did we get out of it?

Me: World War Two, mostly.  And the New Deal.

TG: World War Two?  How did that help?

Me: The government borrowed a lot of money, and used it to pay soldiers, and to pay people who worked in factories making planes and guns.  Once people had money, they spent it, which created demand for stuff.  Then companies had to hire more people to make stuff, and the spiral moved upwards.

TG: So a war did something good?

Me: Unintentionally, yes.

TG: What was the other thing?

Me: The New Deal?

TG: That!

Me: A lot of programs.  It was when Social Security started.  That’s where the government gives money to retired people or old people.  The idea is that they’ll spend it on stuff.  That will create demand for stuff, so companies that make stuff will have to hire people.  

TG: But didn’t they always do that?

Me: No.

TG: So what did retired people do?

Me: Lived with their kids, mostly.

TG: That’s stupid.  Where do they get the money for Social Security?

Me: Taxes, mostly.  And some they borrow.

TG: Why?  Why can’t they just print money?

Me: It doesn’t work like that.

TG: Why not?  They have machines that print money.  I saw them at the mint!  Remember?

Me: Well, yeah, but if they print too much, it becomes worthless.

TG: What?

Me: Some countries tried that, and it didn’t work.  You needed a wheelbarrow full of money to get a cup of coffee.

TG: But the government is money!  Why do they have to tax people for it?  They can just make more!

Me: Imagine if everyone had all the money they wanted.  Would anyone go to work?

TG: Oh yeah.  I guess nobody would make anything.

Me: Exactly.  With lots of money but nothing to buy, money is worthless.  They can’t just print it whenever they want more.

TG: Oh.  I wonder what’s in Area 51...

Comments:
Although we had plenty of money, There was nothing our money could buy. And the Gods of the Copybook Headings said, "If you don't work you die."
 
Excellent. They say the real test of how well you understand something is how well you can explain it to a ten year old. You clearly understand this stuff better than I do.
 
Excellent. They say the real test of how well you understand something is how well you can explain it to a ten year old. You clearly understand this stuff better than I do.
 
Perhaps you don't realize it, because you learned this from textbooks, but the people who had jobs in the Army and in war production plants could not spend the money they made. They couldn't buy cars (steel in tanks), and they couldn't even buy new tires for an old car (rubber, even synthetic rubber, was rationed along with gas). The end of shoe rationing was taken as a sign the war was being won.

And the war needed to be won, as Stephen Karlson put it so succinctly.

So people loaned what they earned to the government via war bonds and stamps to the tune of half of the GDP. (Quite different from today, where government borrows from us via the Social Security trust fund until the Boomers all retire, at a small fraction of that rate.) A single HS could raise a half-million dollars in a month to buy a transport plane for the war effort. Watch a WWII era movie together and point out the ads at the start or end and the rationing stickers on the car windows.

When the war was over, the government paid off those bonds and people's savings were used to buy the cars (and washing machines etc) produced by former war plants (look up the Willow Run plant). Lots of pent up demand over 15 years, somewhat like we are seeing now with car sales. The GI Bill also kept millions from all trying to get a job in 1946, thereby controlling unemployment that might have been a disaster.
 
This is why I have been teaching O (now 8) about taxes ever since he had an allowance and started buying history stuff. "Taxes is what you pay when you buy stuff. A few cents for each dollar." The government uses it to pay for your school, the park we go to, keeping the roads fixed, police, firefighters, state colleges your sisters go to, help for homeless and sick people .... The government is how we all work together to buy and make the things we need as a community which we couldn't get by ourselves." I quiz him sometimes at the cash register-"so why do we pay taxes? What do we buy with them?" I think he gets it.
 
I'm not sure that the New Deal and WWII actually ameliorated the Great Depression so much as going off the gold standard did. Here is another article on the same subject.
 
I suspect that the run on the banks and the stock market crash are pretty important for understanding how "people sort of ran out of money". Importantly, and reassuringly, we not only got the New Deal social programs out of the Depression, we ALSO got FDIC insurance that reduces the risk on the bank side of the problem. The stock market can still tank.
Random note: 10 is a good age to learn this. I can still remember some Great Depression images from my 5th grade social studies textbook. A soup line, something with trees from the CCC, and the newspaper headline about the stock crash.
"People borrowed too much, and couldn't pay it back" is arguably a better description of our recent recession than the Great Depression.

Also, while social security is no longer taking in more than it pays out, it's trust fund isn't gone yet. We don't really borrow for it in a meaningful sense.

Also, also, we *can* just print money, but we *couldn't* with the gold standard in place at the time. There are consequences of doing so, but it is complicated, so it is hard to tell how much money to print to optimize the economy.
 
Excellent point, Becca, about "borrowed too much, and couldn't pay it back" as a common element in both economic failures (and some earlier depressions as well). Buying stock on margin, thereby making huge % returns during a steadily rising market driven by people buying on margin, and flipping houses, thereby making huge % returns on miniscule down payments in a steadily rising market driven by people flipping houses, are essentially the same flawed business plan. It works until someone realizes they are trying to flip a $20,000 shotgun shack without power or plumbing for $100,000, and the music stops.

But one correction about the Social Security trust fund. There will be trouble in the federal budget at the moment the trust fund starts to be paid down. You are right that it isn't "investing" in as much of the deficit as it once did, but it will be very difference once it replaces investment with payout. Something similar may happen to mutual funds when retirees start drawing them down.
 
Interesting interpretation by CC Physicists of my Kipling quote. Yes, during the war a lot of the disposable income had nowhere else to go so financing the war effort by selling War Bonds worked ... although the Treasury refinanced a lot of those small bonds as those workers cashed them in to buy those cars and houses. (And there's a research project or three on whether doing something similar to finance the Afghanistan and Iraq campaigns would be more sensible than urging taxpayers to go to the mall and taking the early expenditures off budget.)

But Kipling also might be thinking about "plenty of money" obtained by printing it (see, e.g., German hyperinflation of 1923 or Zimbabwe hyperinflation more recently.) The Weimar Republic might have been compelled to print money for lack of gold, but there are other technical reasons why a gold standard does not preclude hyperinflation per se.

Now when friend on the wrong coast's son starts asking about using taxes to bail out corporations, or keep the sports team from fleeing town, the conversations will get more interesting.
 
Oh good grief, people are pretending now that the demand stimulus of WWII didn't end the Great Depression? No wonder we're still in the second one now.

Yes, getting off the Gold Standard was vital. No, it wasn't nearly enough.

 
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